10-Q 1 tv506551_10q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to

 

Commission file number 000-55619

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   46-1140492

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1985 Cedar Bridge Avenue, Suite 1    
Lakewood, New Jersey   08701
(Address of Principal Executive Offices)   (Zip Code)

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes   þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes  þ      No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨     Accelerated filer   ¨
Non-accelerated filer   þ            Smaller reporting company  þ
      Emerging growth company þ

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨  No þ

 

As of November 1, 2018, there were approximately 13.5 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust III, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 

 

  

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

 

INDEX

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited) 3
     
  Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 3
     
  Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 4
     
  Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017 5
     
  Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2018 6
     
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 7
     
  Notes to Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
     
Item 4. Controls and Procedures 30
     
PART II OTHER INFORMATION 30
     
Item 1. Legal Proceedings 30
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
     
Item 3. Defaults Upon Senior Securities 30
     
Item 4. Mine Safety Disclosures 30
     
Item 5. Other Information 30
     
Item 6. Exhibits 30

 

 2 

 

 

PART I. FINANCIAL INFORMATION:

ITEM 1. FINANCIAL STATEMENTS:

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   September 30, 2018   December 31, 2017 
   (unaudited)     
Assets        
         
Investment property:          
Land and improvements  $22,378,686   $22,363,107 
Building and improvements   106,002,481    103,807,990 
Furniture and fixtures   17,589,061    16,120,582 
Construction in progress   117,636    1,642,275 
           
Gross investment property   146,087,864    143,933,954 
Less accumulated depreciation   (13,227,815)   (9,107,322)
Net investment property   132,860,049    134,826,632 
           
Investments in unconsolidated affiliated real estate entities   30,562,312    17,805,991 
Cash   10,842,438    45,050,023 
Marketable securities, available for sale   5,850,369    - 
Restricted cash   1,731,390    1,680,056 
Accounts receivable and other assets   3,289,875    2,111,857 
Total Assets  $185,136,433   $201,474,559 
           
Liabilities and Stockholders' Equity          
           
Accounts payable and other accrued expenses  $3,593,514   $2,972,368 
Mortgages payable   79,332,891    86,902,784 
Due to related parties   150,636    162,918 
Distributions payable   666,025    694,333 
Total liabilities   83,743,066    90,732,403 
           
Commitments and Contingencies          
           
Stockholders' Equity:          
           
Company's stockholders' equity:          
Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, $0.01 par value; 200,000,000 shares authorized, 13,505,295 and 13,625,769 shares issued and outstanding, respectively   135,053    136,258 
Additional paid-in-capital   115,906,888    117,061,644 
Accumulated other comprehensive loss   (139,896)   - 
Accumulated deficit   (26,600,968)   (18,548,148)
Total Company stockholders' equity   89,301,077    98,649,754 
           
Noncontrolling interests   12,092,290    12,092,402 
           
Total Stockholders' Equity   101,393,367    110,742,156 
           
Total Liabilities and Stockholders' Equity  $185,136,433   $201,474,559 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 3 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)  

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
                 
Revenues  $9,641,938    9,567,220   $26,595,909   $26,272,336 
                     
Expenses:                    
Property operating expenses   5,547,031    5,323,565    15,924,816    15,343,476 
Real estate taxes   416,958    374,030    1,186,885    1,098,429 
General and administrative costs   695,435    612,268    2,118,404    1,667,145 
Depreciation and amortization   1,422,276    1,326,475    4,179,166    3,978,221 
                     
Total operating expenses   8,081,700    7,636,338    23,409,271    22,087,271 
                     
Operating income   1,560,238    1,930,882    3,186,638    4,185,065 
                     
Loss from investments in unconsolidated affiliated real estate entities   (670,179)   (741,002)   (1,914,788)   (2,066,879)
Other income/(expense), net   169,278    2,183    756,916    (68,117)
Interest expense   (1,197,745)   (1,394,475)   (3,999,401)   (4,124,330)
                     
Net loss   (138,408)   (202,412)   (1,970,635)   (2,074,261)
                     
Less: net (income)/loss attributable to noncontrolling interests   (1)   -    20    22 
                     
Net loss applicable to Company's common shares  $(138,409)  $(202,412)  $(1,970,615)  $(2,074,239)
                     
Net loss per Company's common shares, basic and diluted  $(0.01)  $(0.01)  $(0.15)  $(0.16)
                     
Weighted average number of common shares outstanding, basic and diluted   13,519,833    13,654,309    13,561,919    13,306,503 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 4 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)  

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
                 
Net loss  $(138,408)  $(202,412)  $(1,970,635)  $(2,074,261)
                     
Other comprehensive income/(loss):                    
Holding gain/(loss) on marketable securities, available for sale   27,901    -    (139,898)   - 
                     
Other comprehensive income/(loss)   27,901    -    (139,898)   - 
                     
Comprehensive loss   (110,507)   (202,412)   (2,110,533)   (2,074,261)
                     
Less: Comprehensive (income)/loss attributable to noncontrolling interests   (1)   -    20    22 
                     
Comprehensive loss attributable to the Company's common shares  $(110,508)  $(202,412)  $(2,110,513)  $(2,074,239)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 5 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:    

ITEM 1. FINANCIAL STATEMENTS, CONTINUED.

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

   Common Stock                     
  

Shares

   Amount  

Additional Paid-

In Capital

  

Accumulated Other

Comprehensive Loss

  

Accumulated

Deficit

  

Total

Noncontrolling

Interests

   Total Equity 
                             
BALANCE, December 31, 2017   13,625,769   $136,258   $117,061,644   $-   $(18,548,148)  $12,092,402   $110,742,156 
                                    
Net loss   -    -    -    -    (1,970,615)   (20)   (1,970,635)
Other comprehensive loss   -    -    -    (139,896)   -    (2)   (139,898)
Distributions declared   -    -    -    -    (6,082,205)   -    (6,082,205)
Distributions paid to noncontrolling interests   -    -    -    -    -    (90)   (90)
Redemption and cancellation of shares   (120,474)   (1,205)   (1,154,756)   -    -    -    (1,155,961)
                                    
BALANCE, September 30, 2018   13,505,295   $135,053   $115,906,888   $(139,896)  $(26,600,968)  $12,092,290   $101,393,367 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 6 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months Ended September 30, 
   2018   2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(1,970,635)  $(2,074,261)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Loss from investments in unconsolidated affiliated real estate entities   1,914,788    2,066,879 
Depreciation and amortization   4,179,166    3,978,221 
Amortization of deferred financing costs   357,593    339,067 
Other non-cash adjustments   49,508    34,586 
Changes in assets and liabilities:          
Increase in accounts receivable and other assets   (1,286,200)   (729,920)
Increase in accounts payable and other accrued expenses   561,425    1,202,392 
(Decrease)/increase in due to related parties   (12,282)   20,946 
           
Net cash provided by operating activities   3,793,363    4,837,910 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property   (2,094,188)   (1,992,273)
Purchase of marketable securities   (5,990,267)   - 
Investment in unconsolidated affiliated real estate entities   (15,001,108)   (20,619,816)
Distributions from unconsolidated affiliated real estate entities   330,000    - 
           
Net cash used in investing activities   (22,755,563)   (22,612,089)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payments on mortgages payable   (7,867,485)   (315,379)
(Payment)/refund of loan fees and expenses   (60,002)   4,400 
Proceeds from issuance of common stock   -    18,944,234 
Payment of commissions and offering costs   -    (1,851,754)
Distributions to noncontrolling interests   (90)   (90)
Distributions to common stockholders   (6,110,513)   (4,749,947)
Redemption and cancellation of common shares   (1,155,961)   (281,123)
           
Net cash (used in)/provided by financing activities   (15,194,051)   11,750,341 
           
Net change in cash and restricted cash   (34,156,251)   (6,023,838)
Cash and restricted cash, beginning of year   46,730,079    55,915,948 
Cash and restricted cash, end of period  $12,573,828   $49,892,110 
           
           
Supplemental cash flow information for the periods indicated is as follows:          
Cash paid for interest  $3,729,934   $3,776,641 
Distributions declared, but not paid  $666,025   $672,881 
Value of shares issued from distribution reinvestment program  $-   $1,130,386 
Investment property acquired but not paid  $149,212   $- 
Holding loss on marketable securities, available for sale  $139,898   $- 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 7 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

1.Organization

 

Lightstone Value Plus Real Estate Investment Trust III, Inc. (‘‘Lightstone REIT III’’), incorporated on October 5, 2012, in Maryland, elected to qualify to be taxed as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. The Company has and expects to continue to seek to acquire hotels and other commercial real estate assets primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate.

 

The Lightstone REIT III is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the ‘‘Operating Partnership’’).

 

Lightstone REIT III and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns refers to Lightstone REIT III, its Operating Partnership or the Company as required by the context in such pronoun used.

 

Lightstone REIT III sold 20,000 Common Shares to Lightstone Value Plus REIT III LLC, a Delaware limited liability company (the ‘‘Advisor’’), an entity majority owned by David Lichtenstein, on December 24, 2012, for $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of Lightstone REIT III’s sponsor, The Lightstone Group, LLC (the ‘‘Sponsor’’). Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions and managing the Company’s day-to-day operations. Through his ownership and control of The Lightstone Group, Mr. Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP III LLC, which has subordinated participation interests in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT III or the Operating Partnership.

 

Lightstone REIT III invested the proceeds received from the Advisor in the Operating Partnership, and as a result, held a 99% general partnership interest as of September 30, 2018 in the Operating Partnership’s partner units.

 

The Company’s registration statement on Form S-11 (the “Offering”), pursuant to which it offered to sell up to 30,000,000 shares of its common stock, par value $0.01 per share, (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial offering price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) which were offered at a discounted price equivalent to 95% of the Primary Offering price per Common Share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. On June 30, 2016, the Company adjusted the offering price to $9.50 per Common Share in its Primary Offering, which was equal to the Company’s estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, the Company’s offering price was adjusted to $10.00 per Common Share in its Primary Offering, which was equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016, respectively.

 

The Offering, which terminated on March 31, 2017, raised aggregate gross proceeds of approximately $131.7 million from the sale of approximately 13.4 million shares of common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor). After including the purchase of an aggregate of $12.1 million of Subordinated Participation Interests by the Special Limited Partner and allowing for the payment of approximately $12.2 million in selling commissions and dealer manager fees and $4.8 million in organization and other offering expenses, the Offering generated aggregate net proceeds of approximately $126.8 million.

 

On April 21, 2017, the Company’s board of directors approved the termination of the DRIP effective May 15, 2017. Previously, the Company’s stockholders had an option to elect the receipt of shares of the Company’s common stock in lieu of cash distributions under the Company’s DRIP, however, all future distributions will be in the form of cash. In addition, through May 15, 2017 (the termination date of the DRIP), the Company had issued approximately 0.3 million shares of common stock under its DRIP, representing approximately $3.2 million of additional proceeds under the Offering.

 

 8 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company has no employees. The Company has retained the Advisor to manage its affairs on a day-to-day basis. Beacon Property Management Limited Liability Company and Paragon Retail Property Management LLC (the ‘‘Property Managers’’), both affiliates of the Sponsor, may serve as property managers and/or the Company may utilize third-party property managers. Orchard Securities, LLC (the ‘‘Dealer Manager’’), a third-party not affiliated with the Company, the Sponsor or the Advisor, served as the dealer manager of the Offering until their termination on March 31, 2017, as a result of the termination of the Offering. In addition to the Property Managers, the Advisor is also an affiliate of the Sponsor. These related parties receive compensation and fees for services related to the investment and management of the Company’s assets.

 

Noncontrolling Interests

 

Partners of Operating Partnership

 

On July 16, 2014, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.

 

Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership which committed to make a significant equity investment (the “Contribution Agreement”) in the Company of up to $36.0 million, which was equivalent to 12.0% of the $300.0 million maximum amount of the Offering, which was terminated on March 31, 2017. The Operating Partnership issued one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributed. In connection with the termination of the Offering, on March 31, 2017, the Company and the Sponsor terminated the Contribution Agreement and as result of the termination, the Sponsor is no longer obligated to purchase Subordinated Participation Interests.

 

Through March 31, 2017 (the termination date of the Offering), the Special Limited Partner purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.

 

2.Summary of Significant Accounting Policies

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust III, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

The consolidated balance sheet as of December 31, 2017 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

 

The unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year or any other period.

 

To qualify or maintain our qualification as a REIT, we engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.

 

 9 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

 Notes to Consolidated Financial Statements

(Unaudited)

 

Marketable Securities

 

Marketable securities currently consist of debt securities that are designated as available-for-sale and are recorded at fair value.  Unrealized holding gains or losses for debt securities are reported as a component of accumulated other comprehensive income/(loss).  Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold.

 

An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers’ and its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

Principles of Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of September 30, 2018, Lightstone REIT III had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

 

Recently Adopted Accounting Pronouncements

 

Effective January 1, 2018 the Company adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that that requires amounts that are generally described as restricted cash and to be included with cash when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard using the retrospective transition method.

 

As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for certain of our consolidated properties. Capital reserves are typically utilized for non-operating expenses such as major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves.

 

The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented:

 

   September 30, 
   2018   2017 
Cash  $10,842,438   $48,643,755 
Restricted cash   1,731,390    1,248,355 
Total cash and restricted cash  $12,573,828   $49,892,110 

 

Effective January 1, 2018, the Company adopted guidance issued by the FASB that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values.  The Company anticipates future acquisitions of real estate assets, if any, will likely qualify as an asset acquisition. Therefore, any future transaction costs associated with an asset acquisition will be capitalized and accounted for in accordance with this guidance.

 

Effective January 1, 2018, the Company adopted guidance issued by the FASB that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the previous revenue recognition guidance.  The new guidance requires companies to apply a five-step model in accounting for revenue arising from contracts with customers, as well as enhance disclosures regarding revenue recognition. Additionally, the sale of real estate is required to follow the new model. The Company adopted this standard on January 1, 2018 using the modified retrospective transition method. Due to the short-term nature of the Company's revenue streams, the adoption of this standard did not have an impact on the amount and timing of revenue recognition for revenues from rooms and food, beverage and other ancillary services. The adoption of this standard had no impact on the Company's revenue or net income, and, therefore, no adjustment was recorded to the Company's opening balance of accumulated deficit.  The Company also considered and determined that presenting revenue disaggregated by rooms and food, beverage and other depicts the appropriate categories about the nature and timing of its revenue streams and that no additional disaggregation is needed. See Note 3.

 

 10 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

New Accounting Pronouncements

 

In August 2018, the SEC adopted the final rule amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded. In addition, the amendments expand the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The rule was effective on November 5, 2018 and will be effective for the quarter that begins after the effective date.  Since the Company already includes a year to date consolidated statement of stockholders’ equity in our interim financial statement filings, the adoption of this guidance will result in the inclusion of a quarter to date consolidated statement of stockholders equity in our second and third quarter interim financial statement filings and the inclusion of corresponding prior periods statement of stockholders’ equity for all periods presented.

 

In February 2016, the FASB issued an accounting standards update which supersedes the existing lease accounting model, and modifies both lessee and lessor accounting. The new guidance will require lessees to recognize a liability to make lease payments and a right-of-use asset, initially measured at the present value of lease payments, for both operating and financing leases, with classification affecting the pattern of expense recognition in the statement of earnings. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. The standard offers several practical expedients for transition and certain expedients specific to lessees or lessors. Both lessees and lessors are permitted to make an election to apply a package of practical expedients available for implementation under the standard. The Company intends to apply the package of practical expedients and certain other transition expedients. For transition, the Company intends to recognize all effects of transition in the beginning of the adoption reporting period on January 1, 2019. We expect that the adoption of this standard will result in the recognition of right-of-use assets and related lease liability accounts on the consolidated balance sheet but is not expected to have a material effect on our consolidated financial position or our results of operations, however, the ultimate impact of adopting this standard will depend on the Company’s lease portfolio as of the adoption date.

 

The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations.

 

3.Revenues

 

Revenues consist of amounts derived from hotel operations, including occupied hotel rooms and sales of food, beverage and other ancillary services and are presented on a disaggregated basis below. Revenues are recorded net of any sales or occupancy tax collected from our guests.

 

Room revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room. The Company's contract performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotels. The Company participates in frequent guest programs sponsored by the brand owners of our hotels whereby the brand owner allows guests to earn loyalty points during their hotel stay. The Company recognizes revenue at the amount earned that it will receive from the brand owner when a guest redeems their loyalty points by staying at one of the Company’s hotels.

 

Revenue from food, beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized when these goods or services are provided to the customer and the Company’s contract performance obligations have been fulfilled

 

Some contracts for rooms, food, beverage or other services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied. The contract liabilities are not significant.

 

The Company notes no significant judgements regarding the recognition of room, food and beverage or other revenues.

 

 11 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table represents the total revenues from hotel operations on a disaggregated basis:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
Revenues  2018   2017   2018   2017 
Room  $9,311,724   $9,278,584   $25,644,693   $25,438,374 
Food, beverage and other   330,214    288,636    951,216    833,962 
                     
Total revenues  $9,641,938   $9,567,220   $26,595,909   $26,272,336 

 

4.Investments in Unconsolidated Affiliated Real Estate Entities

 

The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control over these entities. A summary of the Company’s investments in the unconsolidated affiliated real estate entities is as follows:

 

          As of 
Entity  Date of Ownership  Ownership %   September 30,
2018
   December 31,
2017
 
RP Maximus Cove, L.L.C. (the "Cove Joint Venture")  January 31, 2017   22.50%  $17,583,182   $17,805,991 
LVP LIC Hotel JV LLC (the "Hilton Garden Inn Joint Venture")  March 27, 2018   50.00%   12,979,130    - 
                   
Total investments in unconsolidated affiliated real estate entities          $30,562,312   $17,805,991 

 

The Cove Joint Venture

 

On January 31, 2017, the Company, through a subsidiary of the Operating Partnership, REIT III COVE LLC (“REIT III Cove”) and REIT IV COVE LLC (“REIT IV Cove”), a wholly owned subsidiary of Lightstone Real Estate Income Trust, Inc. (“Lightstone IV”), a real estate investment trust also sponsored by the Sponsor and a related party, LSG Cove LLC (“LSG Cove”), an affiliate of the Sponsor and a related party, and Maximus Cove Investor LLC (“Maximus”), an unrelated third party (collectively, the “Members”), completed the acquisition of all of RP Cove, L.L.C’s membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) for aggregate consideration of approximately $255.0 million, which consisted of $80.0 million of cash and $175.0 million of proceeds from a loan from a financial institution. The Cove Joint Venture owns and operates The Cove at Tiburon (“the Cove”), a multi-family complex consisting of 281-units, or 289,690 square feet, contained within 32 apartment buildings over 20.1 acres originally constructed in 1967, located in Tiburon, California.

 

In connection with the acquisition, the Company paid the Advisor an acquisition fee of $0.6 million, equal to 1.0% of the Company’s pro-rata share of the contractual purchase price which is reflected in the Company’s carrying value which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets.

 

The Company paid approximately $20.0 million for a 22.5% membership interest in the Cove Joint Venture. The Company’s ownership interest in the Cove Joint Venture is a non-managing interest. The Company has determined that the Cove Joint Venture is a variable interest entity but the Company is not the primary beneficiary. The Company accounts for its ownership interest in the Cove Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Cove Joint Venture. All capital contributions and distributions of earnings from the Cove Joint Venture are made on a pro rata basis in proportion to each Member’s equity interest percentage. Any distributions in excess of earnings from the Cove Joint Venture are made to the Members pursuant to the terms of the Cove Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of the Cove and receives certain fees as defined in the Property Management Agreement for the management of the Cove. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of January 31, 2017 with respect to its membership interest of 22.5% in the Cove Joint Venture.  During the nine months ended September 30, 2018, the Company made additional capital contributions of $1.7 million to the Cove Joint Venture.

 

In connection with the closing of the Cove Transaction, the Cove Joint Venture simultaneously entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date.  The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by the Cove and an affiliate of the Company’s Sponsor (the “Guarantor”) has guaranteed the Cove Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The Members have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which the Company’s share is up to approximately $10.9 million.

 

 12 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Starting in 2013, the Cove has been undergoing an extensive refurbishment which is substantially completed. The Members used the remaining proceeds from the Loan and have invested additional capital as necessary to complete the refurbishment. The Guarantor has provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide any necessary funds to complete the remaining renovations as defined in the Loan. The Members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which the Company’s share is up to approximately $3.3 million.

 

The Company has determined that the fair value of both the Loan Guarantee and the Refurbishment Guarantee are immaterial.

 

The Cove Joint Venture Condensed Financial Information

 

The Company’s carrying value of its interest in the Cove Joint Venture differs from its share of member’s equity reported in the condensed balance sheet of the Cove Joint Venture due to the Company’s basis of its investment in excess of the historical net book value of the Cove Joint Venture. The Company’s additional basis allocated to depreciable assets is being recognized on a straight-line basis over the lives of the appropriate assets.

 

The following table represents the condensed income statements for the Cove Joint Venture:

 

(amounts in thousands) 

For the
Three Months

Ended
September 30,

2018

  

For the
Three Months

Ended
September 30,

2017

  

For the
Nine Months

Ended
September 30,

2018

  

For the Period
January 31,

2017
(date of investment)

through
September 30,
2017

 
Revenues  $3,672   $3,523   $10,905   $8,724 
                     
Property operating expenses   1,239    1,175    3,660    3,076 
General and administrative costs   41    54    136    196 
Depreciation and amortization   2,420    2,383    7,214    6,348 
Operating loss   (28)   (89)   (105)   (896)
Interest expense and other, net   (2,833)   (2,406)   (8,145)   (6,161)
Net loss  $(2,861)  $(2,495)  $(8,250)  $(7,057)
Company's share of net loss (22.50%)  $(644)  $(561)  $(1,856)  $(1,588)
Adjustment to depreciation and amortization expense (1)   (10)   (180)   (87)   (479)
Company's loss from investment  $(654)  $(741)  $(1,943)  $(2,067)

 

The following table represents the condensed balance sheets for the Cove Joint Venture:

 

   As of   As of 
(amounts in thousands)  September 30, 2018   December 31, 2017 
         
Real estate, at cost (net)  $150,654   $149,727 
Cash and restricted cash   1,433    2,538 
Other assets   2,304    1,541 
Total assets  $154,391   $153,806 
           
Mortgage payable, net  $173,889   $173,534 
Other liabilities   3,395    2,830 
Members' deficit (1)   (22,893)   (22,558)
Total liabilities and members' deficit  $154,391   $153,806 

 

(1)The adjustment to depreciation and amortization expense relates to the difference between the Company’s basis in the Cove Joint Venture and the amount of the underlying equity in net assets of the Cove Joint Venture.

 

 13 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

 Notes to Consolidated Financial Statements

(Unaudited)

 

Hilton Garden Inn Joint Venture

 

On March 27, 2018, the Company and its Sponsor’s other public program, Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone REIT II”), acquired, through LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”) a 183-room, limited-service hotel located at 29-21 41st Avenue, Long Island City, New York (the “Hilton Garden Inn - Long Island City”) from an unrelated third party, for aggregate consideration of approximately $60.0 million, which consisted of $25.0 million of cash and $35.0 million of proceeds from a loan from a financial institution, excluding closing and other related transaction costs. The Company and Lightstone REIT II each have 50.0% joint venture ownership interests, respectively, in the Hilton Garden Inn Joint Venture.

 

In connection with the acquisition, the Company paid an acquisition fee of $0.3 million payable to the Advisor, equal to 1.0% of the Company’s pro-rata share of the contractual purchase price which is reflected in the Company’s carrying value which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets.

 

The Company paid approximately $12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture. The Company’s ownership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. The Company accounts for its ownership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Hilton Garden Inn Joint Venture.  All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each Member’s equity interest percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the Members pursuant to the terms of the Hilton Garden Inn Joint Venture’s operating agreement. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect to its membership interest of 50.0% in the Hilton Garden Inn Joint Venture.   During the nine months ended September 30, 2018, the Company received distributions from the Hilton Garden Inn Joint Venture aggregating $0.3 million.

 

Hilton Garden Inn Joint Venture Financial Information

 

The following table represents the condensed income statement for the Hilton Garden Inn Joint Venture for the period indicated:

 

(amounts in thousands) 

For the
Three Months

Ended
September 30,

2018

  

For the Period
March 27, 2018

through
September 30,
2018

 
Revenues  $2,856   $6,040 
           
Property operating expenses   1,754    3,725 
General and administrative costs   13    15 
Depreciation and amortization   639    1,274 
Operating income   450    1,026 
Interest expense   (482)   (970)
Net (loss)/income  $(32)  $56 
Company's share of net (loss)/income (50.00%)  $(16)  $28 

 

The following table represents the condensed balance sheet for the Hilton Garden Inn Joint Venture:

 

   As of 
(amounts in thousands)  September 30, 2018 
     
Investment property, net  $59,210 
Cash   761 
Other assets   909 
Total assets  $60,880 
      
Mortgage payable, net  $34,752 
Other liabilities   770 
Members' capital   25,358 
Total liabilities and members' capital  $60,880 

 

 14 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

5.Marketable Securities and Fair Value Measurements

 

Marketable Securities

 

The following is a summary of the Company’s available for sale securities as of the dates indicated:

 

   As of September 30, 2018 
Debt securities:  Adjusted Cost   Gross
Unrealized
Gains
  

Gross
Unrealized

Losses

   Fair Value 
                     
Corporate Bonds and Preferred Securities  $5,990,267   $        -   $(139,898)  $5,850,369 

 

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of September 30, 2018, the Company did not recognize any impairment charges.

 

Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 

  Level 1 – Quoted prices in active markets for identical assets or liabilities.
     
  Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
  Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

As of September 30, 2018, all of the Company’s debt securities and were classified as Level 2 assets and there were no transfers between the level classifications during the nine months ended September 30, 2018.

 

The fair values of the Company’s investments in Corporate Bonds and Preferred Securities are measured using readily available quoted prices for similar assets.

 

The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:

 

   As of
September 30,
2018
 
Due in 1 year  $748,125 
Due in 1 year through 5 years   3,166,494 
Due in 5 year through 10 years   1,257,000 
Due after 10 years   678,750 
Total  $5,850,369 

 

 15 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

 Notes to Consolidated Financial Statements

(Unaudited)

 

The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.

 

The Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The margin loan bears interest at Libor plus 0.85% (3.11% as of September 30, 2018).

 

6.Mortgage payable, net

 

Mortgages payable, net consists of the following:

 

Description 

Interest

Rate

 

Weighted

Average

Interest Rate

as of

September 30,

2018

  

Maturity

Date

 

Amount Due

at Maturity

  

As of

September 30,
2018

  

As of

December 31,
2017

 
                       
Revolving Credit Facility, secured by seven properties  LIBOR + 3.50%   6.13%  July 2019  $52,159,414   $52,159,414   $59,696,000 
                           
Promissory Note, secured by two properties  4.73%   4.73%  October 2021   26,127,572    27,576,728    27,907,627 
                           
Total mortgages payable      5.65%     $78,286,986   $79,736,142   $87,603,627 
                           
Less: Deferred financing costs                   (403,251)   (700,843)
                           
Total mortgage payable, net                  $79,332,891   $86,902,784 

 

On June 19, 2018 the Company made a principal payment of $7.4 million in cash on the non-recourse Revolving Credit Facility and the lender agreed to decrease the interest rate to Libor plus 3.50 % from Libor plus 4.95 %. Additionally, the non-recourse Revolving Credit Facility (outstanding principal balance of $52.2 million as of September 30, 2018) matures in July 2019. The Company intends to seek to refinance such existing indebtedness on or before its applicable stated maturity.

 

Principal Maturities

 

The following table, based on the initial terms of the mortgage, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of September 30, 2018:

 

   2018   2019   2020   2021   2022   Thereafter   Total 
                                    
Principal maturities  $114,152   $52,626,285   $486,092   $26,509,613   $    -   $    -   $79,736,142 
                                    
Less: Deferred financing costs                                 (403,251)
                                    
Total principal maturiteis, net                                $79,332,891 

 

Debt Compliance

 

Pursuant to the Company’s debt agreements, approximately $1.7 million and $1.2 million was held in restricted cash accounts as of September 30, 2018 and December 31, 2017, respectively. Such escrows are subject to release in accordance with the applicable debt agreement for the payment of real estate taxes, insurance and capital improvements, as required. Certain of our debt agreements contain clauses providing for prepayment penalties and requiring the maintenance of certain ratios including debt service coverage and fixed leverage charge ratio. The Company is currently in compliance with respect to all of its financial debt covenants.

 

 16 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

7.Selling Commissions, Dealer Manager Fees and Other Offering Costs

 

During our Offering, selling commissions and dealer manager fees were paid to the Dealer Manager or soliciting dealers, as applicable, pursuant to various agreements, and other third-party offering costs such as registration fees, due diligence fees, marketing costs, and professional fees were accounted for as a reduction against additional paid-in capital as costs were incurred. Any organizational costs were accounted for as general and administrative costs. During the three months ended March 31, 2017, we incurred approximately $1.7 million of selling commissions and deal manager fees and less than $0.1 million of other offering costs. We did not incur any of these costs subsequent to the termination of the Offering.

 

From our inception through March 31, 2017 (the termination date of the Offering), we incurred approximately $12.2 million in selling commissions and dealer manager fees and $4.8 million of other offering costs in connection with the public offering of shares of our common stock.

 

8.Earnings per Share

 

The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, basic and diluted earnings per share is calculated by dividing earnings attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.

 

9.Related Party Transactions

 

Due to related parties and other transactions

 

In addition to certain agreements with the Sponsor (see Note 1) and Dealer Manager (see Note 7), the Company has agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, the Company’s ability to secure financing and its real estate operations are dependent upon its Advisor and its affiliates to perform such services as provided in these agreements.

 

The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
Acquisition Fees (1)  $-   $-   $300,000   $573,750 
Development fees (2)   -    -    51,419    - 
Asset Management Fees (general and administrative costs)   447,135    382,022    1,271,867    704,640 
Total  $447,135   $382,022   $1,623,286   $1,278,390 

 

(1)Acquisition fees of $300,000 and $573,750 were capitalized and are reflected in the carrying value of our investments in the Hilton Garden Inn Joint Venture and the Cove Joint Venture, respectively, which are included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets.
(2)Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

10.Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and other assets, accounts payable and other accrued expenses and due to/from related parties approximated their fair values because of the short maturity of these instruments.

 

 17 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The estimated fair value of our mortgages payable is as follows:

 

   As of September 30, 2018   As of December 31, 2017 
   Carrying
Amount
  

Estimated Fair

Value

   Carrying
Amount
  

Estimated Fair

Value

 
Mortgages payable  $79,736,142   $78,418,087   $87,603,627   $86,729,748 

 

The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.

 

11.Commitments and Contingencies

 

Legal Proceedings

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes. As of the date hereof, we are not a party to any material pending legal proceedings.

 

12.Distributions

 

Distribution Payments

 

On August 15, 2018, September 14, 2018 and October 15, 2018, the Company paid distributions for the months ended July 31, 2018, August 31, 2018 and September 30, 2018, respectively, totaling $2.0 million. The distributions were paid in cash.

 

Distribution Declaration

 

On November 13, 2018, the Board of Directors authorized and the Company declared a distribution for each month during the three-month period ending December 31, 2018. The distributions will be calculated based on shareholders of record each day during the month at a rate of $0.00164383 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00 payable on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month.

 

 18 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust III, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust III, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT III, L.P., which we collectively refer to as the “Operating Partnership”.

 

Forward-Looking Statements

 

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the Securities and Exchange Commission (the “SEC”), contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus Real Estate Investment Trust III, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.

 

Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements.

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the failure of the Company to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues as well as other risks listed from time to time in this Form 10-Q, our form 10-K, our Registration Statements on Form S-11, as the same may be amended and supplemented from time to time, and in the Company’s other reports filed with the SEC.

 

We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.

 

Overview

 

Lightstone Value Plus Real Estate Investment Trust III, Inc. (the “Lightstone REIT III”) and Lightstone Value Plus REIT III, LP (the “Operating Partnership”) and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT III, its Operating Partnership or the Company as required by the context in which such pronoun is used. Lightstone REIT III elected to qualify and be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015.

 

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Principally through our Operating Partnership, we have and expect to continue to seek to acquire hotels and other commercial real estate assets primarily located in the United States. Our acquisitions may include both portfolios and individual properties and may be acquired and operated by us alone or jointly with another party. We may also originate or acquire mortgage loans secured by real estate.

 

Our registration statement on Form S-11 (the “Offering”), pursuant to which we offered to sell up to 30,000,000 shares of our common stock, par value $0.01 per share, (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial offering price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) which were offered at a discounted price equivalent to 95% of the Primary Offering price per Common Share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. On June 30, 2016, we adjusted the offering price to $9.50 per Common Share in its Primary Offering, which was equal to our estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, our offering price was adjusted to $10.00 per Common Share in our Primary Offering, which was equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016, respectively.

 

The Offering, which terminated on March 31, 2017, raised aggregate gross proceeds of approximately $131.7 million from the sale of approximately 13.4 million shares of common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor). After including the purchase of an aggregate of $12.1 million of Subordinated Participation Interests by the Special Limited Partner and allowing for the payment of approximately $12.2 million in selling commissions and dealer manager fees and $4.8 million in organization and other offering expenses, the Offering generated aggregate net proceeds of approximately $126.8 million.

 

On April 21, 2017, the Company’s board of directors approved the termination of the DRIP effective May 15, 2017. Previously, the Company’s stockholders had an option to elect the receipt of shares of the Company’s common stock in lieu of cash distributions under the Company’s DRIP, however, all future distributions will be in the form of cash. In addition, through May 15, 2017 (the termination date of the DRIP), the Company had issued approximately 0.3 million shares of common stock under its DRIP, representing approximately $3.2 million of additional proceeds under the Offering.

 

We sold 20,000 Common Shares to Lightstone Value Plus REIT III LLC, a Delaware limited liability company (the ‘‘Advisor’’), an entity majority owned by David Lichtenstein, on December 24, 2012, for $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of our sponsor, The Lightstone Group, LLC (the ‘‘Sponsor’’).

 

Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership which committed to make a significant equity investment (the “Contribution Agreement”) in the Company of up to $36.0 million, which was equivalent to 12.0% of the $300.0 million maximum amount of the Offering, which was terminated on March 31, 2017. The Operating Partnership issued one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributed. In connection with the termination of the Offering, on March 31, 2017, the Company and the Sponsor terminated the Contribution Agreement and as result of the termination, the Sponsor is no longer obligated to purchase Subordinated Participation Interests.

 

Through March 31, 2017 (the termination date of the Offering), the Special Limited Partner has purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.

 

We have no employees. We have retained the Advisor to manage our affairs on a day-to-day basis. Beacon Property Management Limited Liability Company and Paragon Retail Property Management LLC (the ‘‘Property Managers’’), both affiliates of the Sponsor, may serve as property managers and/or we may utilize third-party property managers. Orchard Securities, LLC (the ‘‘Dealer Manager’’), a third-party not affiliated with us, our Sponsor or our Advisor, served as the dealer manager of the Offering until their termination on March 31, 2017 as a result of the termination of the Offering. In addition to Property Managers, the Advisor is also an affiliate of our Sponsor. These related parties will receive compensation and fees for services related to the investment and management of our assets. These entities will receive fees during our offering, acquisition, operational and liquidation stages.

 

To qualify or maintain our qualification as a REIT, we engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.

 

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Current Environment

 

Our operating results as well as our investment opportunities are impacted by the health of the North American economies.  Our business and financial performance may be adversely affected by current and future economic conditions, such as availability of credit, financial markets volatility, and recession.

 

Our business may be affected by market and economic challenges experienced by the U.S. and global economies. These conditions may materially affect the value and performance of our properties and investments, and may affect our ability to continue to pay regular monthly distributions to our shareholders, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due.

 

We are not aware of any other material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our real estate and real estate related investments, other than those referred to in this Form 10-Q.

 

Portfolio Summary –

 

Consolidated Properties: 
                          
   Location  Year Built  Date Acquired 

Year to Date

Available Rooms

  

Percentage
Occupied

for the
Nine Months
Ended

September 30,
2018

  

Revenue per
Available Room
for the Nine

Months

Ended
September 30,
2018

  

Average Daily
Rate for the Nine

Months Ended

September 30,
2018

 
                          
Hampton Inn – Des Moines  Des Moines, Iowa  1987  2/4/2015   32,760    72.3%  $86.22   $119.24 
                              
Courtyard - Durham  Durham, North Carolina  1996  5/15/2015   39,858    70.3%  $71.01   $100.97 
                              
Hampton Inn – Lansing  Lansing, Michigan  2013  3/10/2016   23,478    79.7%  $102.38   $128.49 
                              
Courtyard - Warwick  Warwick, Rhode Island  2003  3/23/2016   25,116    82.1%  $111.08   $135.35 
                              
SpringHill Suites - Green Bay  Green Bay, Wisconsin  2007  5/2/2016   34,671    68.4%  $91.65   $134.01 
                              
Home2 Suites – Salt Lake  Salt Lake City, Utah  2013  8/2/2016   34,125    74.1%  $87.08   $117.45 
                              
Home2 Suites – Tukwila  Tukwila, Washington  2015  8/2/2016   37,947    89.3%  $142.33   $159.46 
                              
Fairfield Inn – Austin  Austin, Texas  2014  9/13/2016   22,932    68.5%  $78.74   $114.88 
                              
Staybridge Suites –  Austin  Austin, Texas  2009  10/7/2016   21,840    61.1%  $65.94   $107.90 
                              
         Total   272,727    74.4%  $94.03   $126.34 

 

Unconsolidated Affiliated Real Estate Entities:             
                      
Multi - Family Residential  Location  Year Built  Leasable
Units
 

Percentage
Occupied as of

September 30,
2018

  

Annualized
Revenues based

on rents at
September 30,
2018

  

Annualized
Revenues per

unit at
September 30,
2018

 
                         
The Cove  (Multi-Family Complex)(1)  Tiburon, California  1967    281   90%  $ 14.2 million    $55,720 

 

Hospitality  Location  Year Built 

Year to Date

Available Rooms

 

Percentage
Occupied

for the Nine
Months Ended

September 30,
2018

  

Revenue per
Available Room
for the Nine

Months Ended
September 30,
2018

  

Average Daily
Rate For the
Nine Months

Ended

September 30,
2018

 
                          
Hilton Garden Inn - Long Island City(2)  Long Island City, New York  2014   34,404   91%  $163.33   $178.90 

 

(1) - Acquired on January 31, 2017.

(2) - Acquired on March 27, 2018.

 

Critical Accounting Policies and Estimates

 

There were no material changes during the nine months ended September 30, 2018 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year ended December 31, 2017, except for the newly adopted accounting standards discussed in Note 2 to the financial statements.

 

Results of Operations

 

As of September 30, 2018, on a collective basis, the Company wholly owned and consolidated the operating results and financial condition of nine hospitality properties, or select services hotels, containing a total of 999 rooms.

 

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Additionally, as of September 30, 2018, the Company held a 22.5% ownership interest in RP Maximus Cove, LLC (the “Cove Joint Venture”), an affiliated real estate entity that owns and operates The Cove at Tiburon (“the Cove”), a multi-family residential property located in Tiburon, California which contains 281 rental units and a 50.0% ownership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that owns and operates a 183-room, limited-service hotel located in Long Island City, New York (the “Hilton Garden Inn - Long Island City”). The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary of the Cove Joint Venture.

 

All of the Company’s properties are located within the United States.

 

Comparison of the Three Months Ended September 30, 2018 vs. September 30, 2017

 

Consolidated

 

The revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended September 30, 2018 and 2017 are attributable to all nine of our consolidated hospitality properties. Overall, our hospitality portfolio experienced a slight decrease in the percentage of rooms occupied, and slight increases in both revenue per available room (“RevPAR”) and the average daily rate per room (“ADR”) during the three months ended September 30, 2018 compared to the same period in 2017.

 

Revenues

 

Revenues were relatively flat at $9.6 million during both the three months ended September 30, 2018 and 2017.

 

Property operating expenses

 

Property operating expenses increased by $0.2 million to $5.5 million during the three months ended September 30, 2018 compared to $5.3 million for the same period in 2017.

 

Real estate taxes

 

Real estate taxes were relatively flat at $0.4 million during both the three months ended September 30, 2018 and 2017.

 

General and administrative costs

 

General and administrative costs increased slightly by $0.1 million to $0.7 million during the three months ended September 30, 2018 compared to $0.6 million for the same period in 2017. The increase is primarily attributable to higher asset management fees resulting from our acquisition of a membership interest in the Hilton Garden Inn Joint Venture (acquired on March 27, 2018).

 

Depreciation and amortization

 

Depreciation and amortization expense increased slightly by $0.1 million to $1.4 million during the three months ended September 30, 2018 compared to $1.3 million for the same period in 2017.

 

Earnings from investments in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities during both the three months ended September 30, 2018 and 2017 was $0.7 million. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture (acquired March 27, 2018) and the Cove Joint Venture (acquired January 31, 2017). We account for our ownership interest in the Hilton Garden Inn Joint Venture and the Cove Joint Venture under the equity method of accounting commencing on the date that we acquired our interests.

 

Interest expense

 

Interest expense decreased slightly by $0.2 million to $1.2 million during the three months ended September 30, 2018 compared to $1.4 million for the same period in 2017. Interest expense is attributable to financings associated with our hotels.

 

Other income/(expense), net

 

Other income/(expense), net increased slightly by $0.2 million to $0.2 million during the three months ended September 30, 2018 compared to the same period in 2017. The increase was primarily related to an increase of approximately $0.2 million in interest income.

 

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Comparison of the Nine Months Ended September 30, 2018 vs. September 30, 2017

 

Consolidated

 

The revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the nine months ended September 30, 2018 and 2017 is attributable to all nine of our consolidated hospitality properties. Overall, our hospitality portfolio experienced slight increases in rooms occupied, RevPAR and ADR during the nine months ended September 30, 2018 compared the same period in 2017 that resulted in a slight increase in revenues and a corresponding increase in property operating expenses.

 

Revenues

 

Revenues increased slightly by $0.3 million to $26.6 million during the nine months ended September 30, 2018 compared to $26.3 million for the same period in 2017.

 

Property operating expenses

 

Property operating expenses increased slightly by $0.6 million to $15.9 million during the nine months ended September 30, 2018 compared to $15.3 million for the same period in 2017.

 

Real estate taxes

 

Real estate taxes increased slightly by $0.1 million to $1.2 million during the nine months ended September 30, 2018 compared to $1.1 million for the same period in 2017.

 

General and administrative costs

 

General and administrative costs increased by $0.4 million to $2.1 million during the nine months ended September 30, 2018 compared to $1.7 million for the same period in 2017. The increase is primarily attributable to higher asset management fees resulting from our acquisition of membership interests in the Cove Joint Venture (acquired on January 31, 2017) and the Hilton Garden Inn Joint Venture (acquired on March 27, 2018) offset slightly by lower acquisition-related costs in the 2018 period.

 

Depreciation and amortization

 

Depreciation and amortization increased slightly by $0.2 million to $4.2 million during the nine months ended September 30, 2018 compared to $4.0 million for the same period in 2017.

 

Earnings from investments in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities during nine months ended September 30, 2018 was $1.9 million compared to $2.1 million for the same period in 2017. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture (acquired March 27, 2018) and the Cove Joint Venture (acquired January 31, 2017). We account for our ownership interest in the Hilton Garden Inn Joint Venture and the Cove Joint Venture under the equity method of accounting commencing on the date that we acquired our interests.

 

Interest expense

 

Interest expense decreased slightly to $4.0 million during the nine months ended September 30, 2018 compared to $4.1 million for the same period in 2017. Interest expense is attributable to financings associated with our hotels.

 

Other income/(expense), net

 

Other income/(expense), net increased by $0.8 million to $0.8 million during the nine months ended September 30, 2018. The increase was primarily related to the receipt of a payment of $0.5 million from one of our franchisors and an increase of approximately $0.2 million in interest income.

   

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Financial Condition, Liquidity and Capital Resources

 

Overview:

 

For the nine months ended September 30, 2018, our primary sources of funds were $3.8 million of cash flows from operations.

 

We have and intend to continue to utilize leverage either in connection with acquiring our properties or subsequent to their acquisition. The number of different properties we will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time.

 

Our future sources of funds will primarily consist of cash flows from our operations. We currently believe that these cash resources will be sufficient to satisfy our cash requirements (primarily operating expenses and our distribution requirements to maintain our status as a REIT) for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

We intend to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate our overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate our overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of September 30, 2018, our total borrowings were approximately $79.7 million which represented 70% of our net assets.

 

Our non-recourse Revolving Credit Facility (outstanding principal balance of $52.2 million as of September 30, 2018) matures in July 2019. We intend to seek to refinance such existing indebtedness on or before its applicable stated maturity.

 

On January 31, 2017, the Cove Joint Venture entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date.  The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by The Cove and an affiliate of the Sponsor (the “Guarantor”) has guaranteed the Cove Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The members of the Cove Joint Venture have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which our share is up to approximately $10.9 million.

 

Starting in 2013, the Cove has been undergoing an extensive refurbishment which is substantially completed. The Members used the remaining proceeds from the Loan and have invested additional capital as necessary to complete the refurbishment. The Guarantor has provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide any necessary funds to complete the remaining renovations as defined in the Loan. The Members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which the Company’s share is up to approximately $3.3 million.

 

Our future borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with non-recourse debt. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.

 

In general the type of future financing executed by us to a large extent will be dictated by the nature of the investment and current market conditions. For long-term real estate investments, it is our intent to finance future acquisitions using long-term fixed rate debt. However there may be certain types of investments and market circumstances which may result in variable rate debt being the more appropriate choice of financing. To the extent floating rate debt is used to finance the purchase of real estate, management will evaluate a number of protections against significant increases in interest rates, including the purchase of interest rate cap instruments.

 

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We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.

 

In addition to making investments in accordance with our investment objectives, we have used and expect to continue use our capital resources to make certain payments to our Advisor. During our organizational and offering stage, we made payments to our Dealer Manager for selling commissions and the dealer manager fee, and payments to our Advisor for the reimbursement of organization and other offering costs.

 

During our Offering, selling commissions and dealer manager fees were paid to the Dealer Manager or soliciting dealers, as applicable, pursuant to various agreements, and other third-party offering costs such as registration fees, due diligence fees, marketing costs, and professional fees were accounted for as a reduction against additional paid-in capital as costs were incurred. Any organizational costs were accounted for as general and administrative costs. During the three months ended March 31, 2017, we incurred approximately $1.7 million of selling commissions and deal manager fees and less than $0.1 million of other offering costs. We did not incur any of these costs subsequent to the termination of the Offering.

 

From our inception through March 31, 2017 (the termination date of the Offering), we incurred approximately $12.2 million in selling commissions and dealer manager fees and $4.8 million of other offering costs in connection with the public offering of shares of our common stock.

 

We have agreements with the Advisor to pay certain fees, in exchange for services performed by the Advisor and/or its affiliated entities.

 

The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
Acquisition Fees (1)  $-   $-   $300,000   $573,750 
Development fees (2)   -    -    51,419    - 
Asset Management Fees (general and administrative costs)   447,135    382,022    1,271,867    704,640 
Total  $447,135   $382,022   $1,623,286   $1,278,390 

 

(1)Acquisition fees of $300,000 and $573,750 were capitalized and are reflected in the carrying value of our investments in the Hilton Garden Inn Joint Venture and the Cove Joint Venture, respectively, which are included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets.
(2)Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

Summary of Cash Flows

 

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:

 

   For the Nine Months Ended
September 30,
 
   2018   2017 
         
Net cash flows provided by operating activities  $3,793,363   $4,837,910 
Cash flows used in investing activities   (22,755,563)   (22,612,089)
Net cash flows (used in)/provided by financing activities   (15,194,051)   11,750,341 
Net change in cash and cash equivalents   (34,156,251)   (6,023,838)
           
Cash and restricted cash, beginning of year   46,730,079    55,915,948 
Cash and restricted cash, end of the period  $12,573,828   $49,892,110 

 

Our principal sources of cash flow were derived from proceeds received from operating cash flows provided by our properties. In the future, we expect our properties will provide us with a relatively consistent stream of cash flow to sufficiently fund our operating expenses, any scheduled debt service and any monthly distributions authorized by our Board of Directors.

 

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Our principal demands for liquidity currently are expected to be acquisition and development activities, including contributions to our investments in unconsolidated affiliated real estate entities, capital improvements to our properties and scheduled debt service. The principal sources of funding for our operations are currently expected to be available cash on hand, operating cash flows and financings.

 

Operating activities

 

The net cash provided by operating activities of $3.8 million during the nine months ended September 30, 2018 consisted of our net loss of $2.0 million and net changes in operating assets and liabilities of $0.7 million offset by depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating $6.5 million.

 

Investing activities

 

The net cash used in investing activities of $22.8 million during the nine months ended September 30, 2018 primarily consisted of approximately $15.0 million related to the acquisition of our 50.0% interest in the Hilton Garden Inn Joint Venture and additional capital contributions to the Cove Joint Venture, the purchase of $6.0 million of marketable securities and capital expenditures of $2.1 million offset by a distribution received from the Hilton Garden Inn Joint Venture of $0.3 million.

 

Financing activities

 

The net cash used in financing activities of $15.2 million during the nine months ended September 30, 2018 consisted of the payment of cash distributions of $6.1 million to our common stockholders, $7.9 million in payments on our mortgages payable and redemptions and cancellation of common stock of $1.2 million.

 

We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

DRIP and Share Repurchase Program

 

Our DRIP provided our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. The Offering provided for 10.0 million shares available for issuance under our DRIP at a discounted price equivalent to 95% of the Primary Offering price per share. Through May 15, 2017 (the termination date of the DRIP), 339,835 shares of common stock had been issued under our DRIP.

 

Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. From our date of inception through December 31, 2017 we repurchased 81,828 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.60 per share. For the nine months ended September 30, 2018, 120,474 shares of common stock have been repurchased under our share repurchase program at an average price per share of $9.71 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP and available cash.

 

On April 21, 2017, the Board of Directors approved the termination of our DRIP effective May 15, 2017. All future distributions will be in the form of cash.

 

Our Board of Directors reserves the right to terminate our share repurchase program for any reason without cause by providing written notice of termination of the share repurchase program to all stockholders.

 

Contractual Obligations

 

The following is a summary of the estimated contractual obligations related to our mortgage payable over the next five years and thereafter as of September 30, 2018.

 

Contractual Obligations  2018   2019   2020   2021   2022   Thereafter   Total 
                             
Principal maturities  $114,152   $52,626,285   $486,092   $26,509,613   $      -   $    -   $79,736,142 
Interest payments   1,088,178    3,174,892    1,287,576    1,051,196    -    -    6,601,842 
Total  $1,202,330   $55,801,177   $1,773,668   $27,560,809   $-   $-   $86,337,984 

 

Our non-recourse Revolving Credit Facility (outstanding principal balance of $52.2 million as of September 30, 2018) matures in July 2019. We intend to seek to refinance such existing indebtedness on or before its stated maturity.

 

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Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.

 

Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

 

We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

 

Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.

 

Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.

 

We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.

 

MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.

 

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We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.

 

Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.

 

Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

 

The below table illustrates the items deducted in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
Net loss  $(138,408)  $(202,412)  $(1,970,635)  $(2,074,261)
FFO adjustments:                    
Depreciation and amortization of real estate assets   1,422,276    1,326,475    4,179,166    3,978,221 
Adjustments to equity earnings from unconsolidated affiliated real estate entity   873,900    715,911    2,346,950    1,907,348 
FFO   2,157,768    1,839,974    4,555,481    3,811,308 
MFFO adjustments:                    
                     
Acquisition and other transaction related costs expensed   (191)   10,804    (502)   165,195 
MFFO   2,157,577    1,850,778    4,554,979    3,976,503 
Straight-line rent(1)   -    -    -    - 
MFFO - IPA recommended format  $2,157,577   $1,850,778   $4,554,979   $3,976,503 
                     
Net loss  $(138,408)  $(202,412)  $(1,970,635)  $(2,074,261)
Less: net (income)/loss attributable to noncontrolling interests   (1)   -    20    22 
Net loss applicable to Company's common shares  $(138,409)  $(202,412)  $(1,970,615)  $(2,074,239)
Net loss per common share, basic and diluted  $(0.01)  $(0.01)  $(0.15)  $(0.16)
                     
FFO  $2,157,768   $1,839,974   $4,555,481   $3,811,308 
Less: FFO attributable to noncontrolling interests   (35)   (30)   (78)   (66)
FFO attributable to Company's common shares  $2,157,733   $1,839,944   $4,555,403   $3,811,242 
FFO per common share, basic and diluted  $0.16   $0.13   $0.34   $0.29 
                     
MFFO - IPA recommended format  $2,157,577   $1,850,778   $4,554,979   $3,976,503 
Less: MFFO attributable to noncontrolling interests   (35)   (30)   (78)   (68)
MFFO attributable to Company's common shares  $2,157,542   $1,850,748   $4,554,901   $3,976,435 
                     
Weighted average number of common shares outstanding, basic and diluted   13,519,833    13,654,309    13,561,919    13,306,503 

 

(1)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

 

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Distribution Payments

 

On August 15, 2018, September 14, 2018 and October 15, 2018, the Company paid distributions for the months ended July 31, 2018, August 31, 2018 and September 30, 2018, respectively, totaling $2.0 million. The distributions were paid in cash.

 

The table below presents our cumulative FFO attributable to the Company's common shares:

 

  

For the period

October 5, 2012

 
  

(date of inception)

through

 
   September 30, 2018 
FFO attributable to Company's common shares  $11,665,078 
Distributions Paid  $19,194,150 

 

New Accounting Pronouncements

 

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been issued or adopted during 2018, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The primary market risk to which we are currently and expect to continue to be exposed is interest rate risk.

 

We are currently and expect to continue to be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives have been and will continue to be to limit the impact of interest rate changes on our earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of September 30, 2018, we did not have any derivative agreements outstanding.

 

The following table shows the estimated principal maturities for our mortgage debt during the next five years and thereafter as of September 30, 2018:

 

   2018   2019   2020   2021   2022   Thereafter   Total 
                                    
Principal maturities  $114,152   $52,626,285   $486,092   $26,509,613   $    -   $      -   $79,736,142 

 

The carrying amounts reported in the consolidated balance sheets for cash, deposits, accounts receivable (included in prepaid expenses and other assets) and accounts payable and accrued expenses approximated their fair values because of the short maturity of these instruments.

 

The estimated fair value of our mortgages payable is as follows:

 

   As of September 30, 2018   As of December 31, 2017 
   Carrying
Amount
  

Estimated Fair

Value

   Carrying
Amount
  

Estimated Fair

Value

 
Mortgages payable  $79,736,142   $78,418,087   $87,603,627   $86,729,748 

 

The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.

 

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As of September 30, 2018, approximately $52.2 million, or 65%, of our debt, is a variable rate instrument (not subject to an interest rate cap or swap) and our interest expense associated with this instrument is, therefore, subject to changes in market interest rates. A 1% adverse movement (increase in Libor or Prime rate) would increase annual interest expense by approximately $0.5 million

 

In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions which may affect our ability to obtain or refinance debt in the future. As of September 30, 2018, we had no off-balance sheet arrangements.

 

We cannot predict the effect of adverse changes in interest rates on our debt and, therefore, our exposure to market risk, nor can we provide any assurance that long-term debt will be available at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes discussed above.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

As of the end of the period covered by this report, management, including our chief executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

 

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.

 

PART II. OTHER INFORMATION:

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities

 

During the period covered by this Form 10-Q, the Company did not sell any unregistered securities.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

 

 

Description

     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*   XBRL (eXtensible Business Reporting Language).The following financial information from Lightstone Value Plus Real Estate Investment Trust III, Inc. on Form 10-Q for the quarter ended September 30, 2018, filed with the SEC on November 14, 2018, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Stockholders’ Equity, (4) Consolidated Statements of Cash Flows, and (5) the Notes to the Consolidated Financial Statement.

 

 * Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE

INVESTMENT TRUST III, INC.

     
Date: November 14, 2018 By:   /s/ David Lichtenstein
    David Lichtenstein
   

Chairman and Chief Executive Officer

(Principal Executive Officer)

 

Date: November 14, 2018 By:   /s/ Seth Molod
    Seth Molod
   

Chief Financial Officer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

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